Get ready for the dawn of the new Isas, Nisas – and with it a host of new ways to maximise returns on your investments and pay little or no tax. The amount you can put into an Isa each year is being boosted on July 1 from £11,880 to £15,000. And with this welcome change come other new freedoms.

These include the ability to move savings freely between cash, shares and other investments – with all capital gains and most income out of the taxman’s reach. The radical overhaul means Isas, already popular, become even more valuable to every generation of saver, as we explain here.

Key to the changes being made to Isas is the ability to save more cash. Until July 1, when the new rules apply, only half of the total Isa allowance can be put into a savings account. But from that date the full allowance can be used however it best suits the saver: cash, shares, or a range of other assets.

For younger savers with short-term objectives – the deposit for a home, for instance – this change is especially beneficial. Over longer time frames shares, or funds investing in shares, do deliver better returns than cash. But they are also subject to short-term volatility.

Being able to move investments into cash as you approach the moment of spending is essential.

Cash Isa rates are low and, in the run-up to the introduction of the higher allowance, appear to be falling. But over time, and with a backdrop of rising interest rates, it is expected that there will be increased competition and that cash will remain extremely popular with Isa investors.

LATER WORKING LIFE

Boosting your Isa ahead of retirement

If your time horizon is 40 years you really can’t lose on the stock market. But it’s a different story at 10 or 20 years. Many people when they are this far from retirement want to protect their portfolios from the market’s ups and downs.

The way to do this is to have a mix of assets, including bonds and cash. The ideal course of action for many Isa savers as they move into the second half of their working life is to switch some of their holdings in shares to those other assets.

Under the old Isa rules you could not move from shares to cash. Although some stocks and shares Isa did offer a “cash park” facility, interest rates were lower than those on cash Isas and any interest was taxed. The new rules sweep away this restriction, so investors now have complete freedom to move between shares, bonds and cash.

Remember though that you must carry out such switches as Isa transfers – don’t just sell your shares and use the proceeds to take out a cash Isa as this will count instead as a new subscription and would be subject to the annual allowance in force at the time. As an illustration, a saver with £200,000 accumulated in a stocks and shares Isa who decided to switch a quarter of it, or £50,000, to cash on July 1 could do so without a problem by using an Isa transfer, but if he or she sold shares and took the money out of the Isa system, the maximum that could be reinvested in a cash Isa would be £15,000.

EARLY RETIREMENT

Making your Isa money stretch

If you plan to live off the income from your Isas, the good news is that all such income is tax free and doesn’t have to be declared on your tax return.

But how should you invest your Isa money to produce an income that does not fluctuate too wildly in response to market movements but still has the chance to grow? After all, your retirement could last for decades and over such a long period of time even relatively low rates of inflation can deal a heavy blow to the living standards of those on a fixed income.

Many investors choose a diversified mix of assets, including cash, shares and property (in the form of funds), for their retirement income. This can be via separate funds or all-in-one “multi-asset” funds. Again, the fact that the new rules allow savers to switch Isa money to cash without losing tax benefits will make their lives much easier.

But there is a reason to include cash in your retirement portfolio that goes beyond the normal arguments for diversification.

Consider what would happen if, at a time of depressed stock markets, you needed to withdraw a lump sum, beyond your regular income, for a specific need, perhaps to help your children buy a house or for home repairs.

To raise the extra money you would need to sell some of your investments. But if markets are low, you need to sell more shares to realise a particular sum. This means you have fewer assets to generate your income in future, so your standard of living could be permanently affected.

A much better solution is to withdraw the lump sum from your cash savings and leave the shares untouched so that they have time to recover.

Many investors have Isa portfolios worth more than £1m even under today’s regime. When the new, more generous allowances come in, it will be far easier to amass large sums within the valuable tax wrapper of an Isa.

Even when people no longer earn an income, as is typically the case in later retirement, there will still be opportunities to put money inside an Isa when, for example, pensioners sell properties or downsize, or inherit assets from a relative. Each new tax year will enable £15,000 more of this money to go inside the Isa.

The mounting problem for many will be how to manage those Isa assets as part of wider estate planning in order to limit the inheritance tax that could be payable by children or other beneficiaries. Isa savings are counted as part of your estate. On your death your children will be liable to inheritance tax at 40pc above the threshold, currently £325,000 per person or £650,000 per married couple. Not only are they subject to inheritance tax, but once Isa money is bequeathed the Isa wrapper is lost and the savings become taxable again as normal.

But there is one Isa perk, available since 2013, which can help with inheritance tax planning. This is the inclusion of Aim shares within Isas. Aim shares are listed on London’s mini Alternative Investment Market. They are typically smaller companies. Some of these shares qualify for exemption from inheritance tax – and because they can now be held within an Isa they present an opportunity to reduce the tax bill.

Stan Grierson, 75, has invested in shares for more than 50 years and is a great Isa enthusiast – and welcomes their recent extensions. He said: “This extra allowance is very welcome. Nigel Lawson introduced Peps with a £2,400 allowance and here we have £15,000.” He is currently switching some of his Isa money into Aim stocks. “It’s a valuable extra flexibility of the Isa,” he said.

As a board member of Sharesoc, the lobby group promoting the interests of private shareholders, Mr Grierson is a fan of owning shares directly rather than investing in funds such as unit trusts, whose costs can be high. “If you split your £15,000 between just the five biggest companies in the FTSE – which are HSBC, Shell, BP, GlaxoSmithKline and BAT – you would on the basis of current dividends receive an annual income of £665, tax free. And you would own some fine companies, with no future capital gains tax to pay. That would seem to me a very good place to start investing.”